RTX Corporation (RTX) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Raytheon Third Quarter 2011 Internal Earnings Conference Call. My name is Deanna, and I'll be the operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the call over to your host, Mr. Todd Ernst, Vice President, Investor Relations. Please proceed, sir.

Thank you, Deanna. Good morning, everyone. Thank you for joining us today on our third quarter conference call. The result that we announced this morning, the audio feed of this call and the slides we'll reference are available on our website at raytheon.com. Following this morning's call, an archive of both the audio replay and a printable version of the slides will be available in the Investors Relations section of our website. With me today are Bill Swanson, our Chairman and Chief Executive Officer; and Dave Wajsgras, our Chief Financial Officer. We'll start with some brief remarks by Bill and Dave and then move on to questions. Before I turn the call over to Bill, I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance constitute forward-looking statements. These statements are based on a wide range of assumptions that the company believes are reasonable, but are subject to a range of uncertainties and risks that are summarized at the end of our earnings release and are discussed in detail in our SEC filings. With that, I'll turn the call over to Bill.

Thank you, Todd. Good morning, everyone. Raytheon's performance was solid in the third quarter. Our focus on execution drove strong margins and cash flow. Our new awards resulted in a book to bill of 1.12 and reflects good customer demand for our products. Execution was strong across all our businesses. Our bookings were driven in part by 13 programs over $100 million each, primarily driven by Missile Systems, which had over 50% of these contract awards. I want to point out that this was the second highest quarter in bookings ever for our Missile business. In dollar terms, these 13 awards represent more than 40% of our $6.9 billion for the quarter. The remaining 60% of orders was comprised of hundreds of programs averaging under $5 million each. The take away for us is that our customers continue to invest in our affordable and innovative solutions that Raytheon has to offer. It's also notable during the quarter we received just under $1.3 billion of international orders. We continue to see strong demand globally for our technologies and products. Our Classified business remains an area of strength as well, with sales increasing by 10% in the quarter, the vast majority of which was organic. As we all know, the overall budget environment remains fluid. Once again, we're operating under a continuing resolution, which is reflected in our updated guidance. Dave will provide some color around this in his remarks. Given the economic environment, we're focusing on the things we can control. We continue to work closely with our customers to reduce costs, shorten time lines and improve efficiency. Our efforts to streamline the supply chain, reduce overhead and optimize our facility utilization are moving forward, and we are seeing continued improvements. Given today's global threat environment, we believe defense will continue to be a high priority in our government's future spending plans. As such, I want to take a few minutes today to highlight some of the recent key technology wins, and there's a lot of exciting work that we're doing to support our customers which will drive future growth. Raytheon BBN received an order or orders from the U.S. Army for a variant of the Boomerang shooter detection system, which pinpoints incoming small arms fires from the shooters, helping to protect our troops. IDS was awarded a contract for developing an integrated GPS-based system for navy surface ships and subsurface platforms, which uses open architecture net-centric approach to allow hosting the positioning, navigation and timing data in a common computing environment, thus enhancing the ship's operability with onboard systems. While at the same time, SAS received a contract from the Air Force Research Laboratory for the development of advanced high anti-jam GPS situational awareness sensors for applications on small weapons and UAV systems. And just to further emphasize our cutting-edge technology and innovative solutions continue to be well aligned with our customers' evolving requirements, particularly in the areas of air and missile defense, ISR, EW, Air Traffic Management, Homeland Security and training. Let me sum up by saying we had a solid quarter in a challenging environment. Our strategies and our efforts to take out costs are reflected in our results, and we will continue to deliver value for our customers and our shareholders. All of this is made possible by the dedication, hard work and world-class talent of the Raytheon team. With that, let me turn it over to Dave.

Okay. Thanks, Bill. I have a few opening remarks starting with third quarter highlights and then we'll move on to questions. During my remarks, I'll be referring to the webslides that we issued earlier this morning. If everyone could please move to Page 3. As Bill noted, we performed well in the third quarter. Our continued focus on performance and execution across the company drove margins, EPS and operating cash flow results during the quarter. Our total company bookings for the quarter was $6.9 billion resulting in a book-to-bill ratio of 1.12. Our adjusted EPS, which excludes the FAS/CAS pension adjustment and a favorable tax settlement was $1.39, up 3% driven by capital deployment actions, as well as operational improvements. Sales were $6.1 billion in the quarter, about $100 million below our guidance and reflects the challenging environment. Adjusted operating margins were up 20 basis points to 13%. We delivered strong operating cash flow from continuing operations of $859 million, which is better than expected, driven primarily by working capital. I'll address updates to our 2011 guidance in just a few minutes. During the quarter, the company repurchased 7.6 million shares of common stock for $312 million, bringing the year-to-date share repurchase to 20.1 million shares for $937 million. And as we announced last month, the company's Board of Directors authorized the repurchase of up to an additional $2 billion of the company's outstanding common stock. It's also worth highlighting that on October 17, Moody's upgraded our long-term senior unsecured credit rating to A3, reflecting the company's strong financial position. Turning now to Page 4, let me start by providing some detail on our third quarter results. Our total company bookings for the quarter were $6.9 billion and on a year-to-date basis were $19.4 billion. Taken together in the last 2 quarters, we have seen solid bookings on both a domestic and international basis. Notable bookings in the third quarter included $584 million of missiles for the production of AMRAAM for the U.S. Air Force and international customers, $329 million for the development of Standard Missile-3 for the Missile Defense Agency and $221 million for production of Evolved Sea Sparrow Missiles for the U.S. Navy and international customers. SAS and IIS booked $468 million and $313 million respectively on a number of classified programs. NCS booked $187 million for the production of Sentinel radars spares and services for the U.S. Army and international customers. IDS booked $142 million for the production of airborne, low-frequency sonar systems and spares for the U.S. Navy and $93 million to provide advanced Patriot air and missile capability for an international customer. And Technical Services booked $256 million for domestic training and $67 million for foreign training programs. Backlog at the end of the third quarter was $35 billion, an increase of approximately $400 million over year end 2010. So if you'd now move to Page 5. Sales were $6.1 billion, slightly below our previous expectations due to the timing of program awards, as well as our cost-reduction efforts. Comparing sales by business to last year's third quarter, IDS had net sales of $1.2 billion. The change in IDS was primarily due to lower volume on international Patriot and the Zumwalt program as a result of the revised funding profile, which I spoke about on prior calls. It's also worth noting that the 30-day formal notification for Saudi Patriot was submitted to Congress on October 19. We expect to receive approval, our approval letter, from the State Department after the 30-day clock expires. IIS had third quarter 2011 net sales of $760 million compared to $735 million in the third quarter of 2010, primarily driven by higher sales on classified programs. Missile Systems had net sales of $1.4 billion, in line with the same period a year ago. NCS had net sales of $1.1 billion. The change in net sales is primarily due to ground-based sensor programs for the U.S. Army, which are nearing completion. Space and Airborne Systems had net sales of $1.3 billion in the quarter, up 5%, primarily driven by growth on intelligence, surveillance and reconnaissance programs, as well as sales related to Raytheon Applied Signal Technology. The integration of Applied Signal Technology is going well, and their programs and results are tracking to our objectives. And Technical Services had net sales of $817 million, the 6% change was primarily due to lower sales on programs that are nearing completion, including a DTRA program and a TSA program. Moving ahead to Page 6, we were pleased by our overall company margin performance. Our adjusted margin was 13%, up 20 basis points. On a year-to-date basis, our adjusted margin was 12.7%, also up 20 basis points over the comparable period in 2010. The strength of our margins reflects the benefits of our broad portfolio of programs, both domestic and international, as well as our focus on executing cost reductions and efficiencies. So looking at margins by business, IDS, Missiles, NCS and Technical Services margins were up in the quarter compared with the same period last year, the result of solid operating performance. IIS margins were essentially in line with prior year's Q3. Now at SAS, the change in margins was in part due to acquisition and integration-related costs, which had an impact of approximately 60 basis points in the quarter and a $14 million or 110 basis points -- a $14 million charge or 110 basis points related to a contract modification. You may also remember that last year's third quarter was exceptionally strong for SAS from an overall performance standpoint. Turning now to Page 7. Third quarter 2011 adjusted EPS was $1.39. The increase was driven by program performance and capital deployment actions, specifically share repurchases and on the year-to-date basis, adjusted EPS was $4.17, up 6% from the same period last year. If you'd now turn to Page 8. I'd like to comment on our current guidance for the year. We now see sales for the year in the range of $25 billion to $25.3 billion. Broadly speaking, the revised outlook reflects the current environment that the industry is facing. More specifically, there have been delays in new program starts and funding. We expect this to be the case for the balance of the year, driven by the CR from a domestic standpoint. Further impacting the near-term sales outlook is the timing of international awards and our cost-reduction initiatives. As we've done in prior years, during the third quarter, we updated our actuarial estimates related to our pension plans. As a result of the update, FAS/CAS pension expense for the year decreased by $27 million, from $365 million to $338 million. We have raised the lower end, narrowing our adjusted EPS outlook to be between $5.55 and $5.65. We increased our 2011 guidance for GAAP EPS to be between $4.94 and $5.04, which reflects the updated full year FAS/CAS pension expense and a slightly higher-than-expected tax settlement. Our current operating cash flow outlook for the full year of $2.1 billion to $2.3 billion remains on track. Overall, our updated outlook for 2011 reflects our ability to drive performance through operational improvements and capital deployment actions. And as you can see on Page 9, we've reflected the change in our guidance by business. The increase in margin reflects the expected additional benefits of productivity and efficiency initiatives. Overall, we're pleased with our operational performance and the results we've delivered while at the same time, passing along cost savings to our customers. Now typically, we provide initial guidance for next year on our third quarter call. But given the environment, the continuing resolution, as well as the outcome from the super committee's recommendations, which we expect to see on November 23, it wouldn't be prudent to provide 2012 guidance at this time. As we look ahead, there are a range of possible outcomes from an industry perspective. With that said, we believe Raytheon is well positioned given our diverse portfolio, international content, strong performance, bookings, efficiency results and a solid financial foundation. We've had a strong book to bill for the last 2 quarters at an average of 1.16. We are taking out costs -- we are taking costs out of the business and we've seen the results in our operating margins. And again, our broad portfolio of technologies and products are well aligned with customer priorities, both domestically and internationally. As we've done in the past, we intend to provide detailed 2012 guidance on our fourth quarter earnings call in January. So if you would please move to Page 10, we've provided a FAS/CAS pension adjustment matrix for 2012 as we've done in prior years. And just to be clear, the discount rate and the actual asset returns won't be known until we close out 2011. Before we open it up for Q&A, let me summarize. We saw solid performance in the third quarter and in many areas exceeded the guidance we provided back in July. We had strong bookings, strong margins and better-than-expected operating cash flow. Our results reflect the actions we've taken to continue to deliver solid performance notwithstanding the current economic environment. Looking ahead, we remain laser-focused on delivering best value for our customers. This includes making sure the company continues to be proactive and have the right cost structure to operate effectively and efficiently in a dynamic and evolving marketplace. We're well positioned to address the challenges in our industry and deliver affordable, innovative solutions that meet the needs of our customers while also creating value for our shareholders. So with that, Bill and I will open the call up for questions.

[Operator Instructions] The first question will come from the line of Heidi Wood, Morgan Stanley.

Bill, various defense contractors have taken a range of strategies to kind of offset the defense budget down cycles, focusing on international or healthcare, IT. It seems like you're spending more and more time working on Homeland Security. Can you talk to us a little bit about how you're differentiating your strategy on that and when you're going to start to see more and more effects of the efforts you're putting in there?

Yes, Heidi, it's a great question. I'd like to just go back and say we've got a solid foundation in air and missile defense and in ISR, EW and if you look at cyber and the other areas we're working on. For us, they really provide us the foundation for Homeland Security. And when you look at it, it really goes into Border Security and it really goes into the command-and-control that some nations need to be able to integrate their air picture or their ground picture into providing what I call high-fidelity information to them so they can make decisions. So for us, the Homeland or Border Security really brings together all the aspects of the company, and it's really a natural. And you know our portfolio, so you can imagine how it all comes together. So for us, we've got international C2 opportunities that we expect to see in either Q4 or Q1. We've got some international sensing programs that should be coming in that will tie all that together. And I guess, the way I'd look at it is as you look at the U.S. pulling out of forward -- our forward presence, one of the things everybody wants to know is what's going on, on the borders. And we believe our company has all the tools to be able to do that. From a bookings point of view, we expect to be around $750 million, $800 million this year, and we expect sales to be between $750 million and $800 million in the same range, both of those are increases over the prior year. So we see growth, if that helps.

Great. And then my follow-up question, Bill, is that, and I unfortunately burdened the 2 executives yesterday with this question so you weren't alone in this one, but the Pentagon is engaging in this should cost exercise which is -- appears to be going not just to the primes but also to the suppliers, and of course, you have industry-leading margins. Doesn't this exercise imply lower margins, lower revenues, and in fact, possible contract delays, because this government analysis is going to create some disagreement and thus delays in contracting?

I guess I don't look at it that way, Heidi. I view the kind of programs we have, if you take AMRAAM, we're in our 25th or 26th year. And every year, we're asked to deliver AMRAAMs. We've grown them from model A to model D. And if you look at it, the government looks to us to give them more increased capability and to be able to do that at a lower price. And so we kind of get up every day and have to do that, and it's part of our D&A culture. And as Dave talked about, our margins went up because we're taking costs out of the business. And you know what, when we propose it next time, those proposals will reflect that lower cost. So that's good for our customers and we don't have a hang-up with it. I mean, our company's D&A is being competitive in doing what we do. So that's, I guess, why I don't have any concern about it.

And the next question will come from the line of Carter Copeland, Barclays Capital.

Just a couple of quick ones. First off, Dave on the margins for -- that are implied in the fourth quarter, I'm sure you're prepared to answer this one. But in TS, we're obviously implying a bit of a deterioration and in IIS, you're implying about 9%, it looks like, given the guidance, and in NCS, about 13%, which is running below where you've been the first 3 quarters of the year. Can you just give us some color on what's happening in those 3 segments in terms of profitability in the fourth quarter?

Yes. So with respect to TS, both the third quarter and year-to-date was above guidance as we generated strong performance on some of the contracts that are reaching the end of life basically. Q4, there is a mix change from efforts on lower margin work, and we also expect a lower throughput in our Customized Engineering & Depot Services business, which is a higher margin business. We did raise the margin outlook for the year, 60 to 90 basis points, and that, as you've noted, is driven by the year-to-date performance. So you asked about -- I'm sorry, the other 2 businesses were IIS...

IIS and NCS.

Right. So there's nothing too remarkable going on with respect to IIS. They've performed well. As you know, early in the year, a letter of credit was drawn by the UKBA and that impacted the year-to-date results. Q4 does include sales on some higher margin programs, and we have a lot of confidence in that business just given the way they've delivered throughout the year. On the last business, SAS. I'm sorry, NCS...

NCS, yes.

NCS. For both the third quarter and year-to-date, we've exceeded our expectations. There are some mix changes slightly in Q4, which are driven by new starts, new program starts on development work and also a ramp down on some longer-standing production programs, specifically for the U.S. Army. We have raised our full year guidance 30 to 50 basis points, and again, that's driven by the year-to-date performance and the timing of some cost improvements that's been initiated in that business.

Great. And then a follow-up on the pension front. I wondered if given where we are today, if you could tell us a little bit about how you're thinking about pension funding for next year and beyond and how that may have changed given where we are with discount rates.

Right. So obviously, this is forward-looking. Today, the environment for the discount rate would be somewhere in the 5% to 5.25%. In 2011, from an assumption standpoint, we had used 5.75%. The expected returns, long-term expected returns, at 8.75% for '11 are expected at this point to be the same for '12. From an actual return standpoint, as of close of business yesterday, we were -- our pension assets were running at just about negative 1%. So we're right around breakeven from that standpoint. From a funding perspective, given sort of those assumptions, looking ahead, we would see gross funding at about $1.3 billion next year, which is up from $1.1 billion this year. Now obviously, neither those numbers, '11 or '12, includes any discretionary pension contributions, the type that we've done in the past.

The next question will come from the line of Troy Lahr, Stifel, Nicolaus. Troy J. Lahr - Stifel, Nicolaus & Co., Inc., Research Division: I know you didn't want to talk about 2012, but in a flat budget environment, can you still see Raytheon having some growth next year?

It's Bill, let me answer this. If we were to assume the DoD is flat to slightly negative due to inflation, we believe that in that case, our international backlog opportunities and portfolio and our technology would more than offset this impact, if that helps. That's kind of how we think about it. Troy J. Lahr - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So flat to down, you might be flattish I guess, you're saying?

Or up a skosh. It's all the timing. But from our standpoint, I think how we look at it is, DoD flat to slightly negative, including inflation. Troy J. Lahr - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then a follow-up, can you just update us on what you're thinking about bookings? I think you were previously at $27.5 billion.

Yes. Right now, if you look at it, crystal ball would say we're about at $27 billion plus or minus $500 million, and we're probably right at the midpoint there. So it's still strong bookings in this environment.

The next question will come from the line of Sam Pearlstein, Wells Fargo.

Can you talk a little bit about, I guess, if you take the, call it, $500 million or so of sales that you've pushed out in terms of the year, can you characterize that in terms of what our program delays versus maybe cancellations and even in the cost-plus world, where you've lowered the cost structure so you're actually getting hit because of the cost-plus nature of those contracts?

Okay, so Sam, that is a good question, and we'll add some clarity to that. So if you think about the outlook coming down $500 million to $600 million, about half of that, a little more than half of that, relates to the timing of awards that we've been talking about on the last quarter or 2. Around 25% of it relates to the continuing resolution that we now find ourselves in, and a little less than 25% relates to the cost-reduction actions, again, that we've been engaged in throughout the year.

Okay. And then just as we think about and look at that continuing resolution and what may change, given your large backlog, can you just talk about which businesses are probably the most sensitive to near-term changes in the budget environment where you would call them, I guess, short-cycle type of businesses where if we see a reduction, it immediately affects your business?

Yes, usually short cycle is lower margin kind of business. And for us, RTSC's margins aren't that bad, but they'd be probably more affected than anyone on short cycle. If you look at Missiles, their programs usually have good gestation periods, as I call them. They run 3 to 4 years. IDS, SAS is in that category. IIS would probably be next to RTSC, only because the intelligence community runs on a shorter span cycle, and then I would say NCS would be in the middle, if that helps.

Because what generally happens is programs that are fungible, if you're looking at Fed IT or IT kind of thing, so that's where people can really cut first and have an effect. So that's where I would see part of the pressure coming.

And the next question will come from the line of Rob Spingarn, Crédit Suisse. Robert Spingarn - Crédit Suisse AG, Research Division: A couple questions on the segments. IDS, you talked about the lower Patriot or the absence of the -- an international contract there. But Dave, could you walk through -- the margins went up, the sales went down, wouldn't this have actually reduced margins or was there an award fee or reserve reversal in the Q that helped?

No, there was no reserve reversal. What we alluded to with respect to the International Patriot business was just the timing of activity year-over-year. I would read absolutely nothing into that. The Patriot business for us is very, very, strong, very, very healthy. We have a very solid pipeline. We've articulated a multitude of opportunities. It's simply just timing of activity this quarter versus last year's third quarter for programs that are essentially in production. From a margin standpoint, IDS did perform exceptionally well. It was driven by a combination of both contract mix, domestic and international, as well as overall cost-reduction improvements. So I hope that puts the right frame... Robert Spingarn - Crédit Suisse AG, Research Division: Well, it does. And then I would ask you, cost reduction is a theme here. We're seeing a lot of cost takeout across the contracting base, not just from you, but from peers as well. I mean, how much further can this go? How much headroom do you have? And then the other thing I wanted to ask you about is you talked about the weaker army -- this is in tangent to Sam's question. The weaker army business you saw on NCS, army looks like it's going to get hit the hardest here in the budget. So how long can -- how much downside do you see across the segments in army, so cost takeout and army downside.

Okay. So Raytheon has strong margins historically, and certainly, that's the case for 2011, and in particular, the third quarter. We continue to find ways to improve the overall efficiency of the business. And the byproduct of improving efficiency is improved cost and higher margins, and ultimately, a more competitive business. I would suggest that we will continue to find ways to improve the overall efficiency, to take costs out of the company, whether that's in supply chain, in overhead, in G&A. We're approaching NBI differently today than we did in the past, so we've become very, very efficient on bidding on new programs, both competitive and sole source. So I would say you could expect the cost-reduction improvements that we've made to continue into the foreseeable future. With respect to the U.S. Army production program, that's something we've been talking about for quite a while. It's primarily ground-based sensors and products related to ground-based sensors. This is -- it's not new news. It's something we had planned on. It's something the customer had planned on. NCS is doing a fine job in transitioning that business into a broader portfolio of products, focusing on international, on Homeland Security, on air traffic control. And we expect NCS to deliver very well for Raytheon as we go forward into '12 and beyond.

And the next question will come from the line of Robert Stallard, Royal Bank of Canada.

Dave, a quick overview on the bookings. I was wondering if you also had some good bookings in the quarter. But if you were to split them out between exports and domestic, what was the sort of year-on-year growth or decline in those 2 buckets?

Okay. So from a bookings standpoint, in Q3, Bill actually mentioned this earlier, we had about $1.3 billion in international bookings, and $5.6 billion in domestic bookings. Overall, the bookings increased by about $1 billion. And that was -- over last year, that was, I believe, and I'll confirm this, split about equally relative to both international and domestic. But I will confirm that for you.

And Dave, I would add that we see bookings this year being about 30% international and sales being about 25%. So that would give you an idea of the mix kind of how we look at where the year will end up, just to add a little color there.

Okay. As a follow-up related to the exports, Bill. I was wondering if you could give us an update on some of your major targets out there on the export market and whether any of these have been delayed as tends to happen.

There's a lot going on international for us. And let me kind of take them off my mind here. We got TPY-2 radars that are both domestic and international. We expect about $800 million in the radar side of those. Between, I'd say, Q4, Q1, I'd say half international, have domestic. We've got Taiwan Patriot that we're expecting to wrap up this year. That'd be Q4, say, $600 million plus or minus $100 million. We've got Kuwait 2 or a 4 lot depending on what they really want to do, so that could be $600 million to $1 billion. We look at that at first half of fiscal year '12. We've got Paveways, which are continuing to be in demand due to replenishment and so forth. So we see about $500 million in that late Q4, some in the first half of fiscal year '12. Our air traffic control radars are about $200 million to $300 million. We see those in Q4, Q1. Missiles, even though they had a great quarter, we're seeing another $600 million to $800 million for them, about 1/3 in Q4 and I'd say about 2/3 of that will show up in the first half of next year. Training, about $100 million we see internationally in Q4. We've got Turkey Patriot. We expect to hear their decision sometime later this year, and that should be awarded, say, mid in the next year on that program, and that will be good sized depending on what they get. You probably read Oman is looking for ground-based air defense systems about $1 billion to $1.5 billion. So we're working that. International C2, we expect to see $400 million or $500 million internationally in Q4, Q1. And what am I forgetting? Oh, and international Border Security kind of radar, the $100 million probably fourth quarter this year. And I think I could keep going but I'd stop there. The international, very strong. There are delays. But they're -- I guess the way I look at them, I don't like delays, but we live with them. They're not cancellations, and that's the way you've got to look at it. We feel very good about our product line and what we're discussing with our customers and they're buying. Just pinpointing that time is hard because their schedules are different than ours and of course, patience is not a Western virtue. So we work hard to get them done.

Rob, just last thing. While Bill was talking, I was able to just confirm. It was about 50-50. The incremental $1 billion is split between international and domestic on about a 50-50 basis.

And the next question will come from the line of David Strauss, UBS.

Dave, can you touch a little bit on cash flow? You maintained your guidance, but I think in the quarter, you came in a couple hundred million ahead of your expectation. Obviously, that would still put you in your guidance range, but could you maybe talk if you're trending towards the high end of that?

Yes. I think that at this stage, again, we give, obviously, bookends, cashes, the toughest thing to nail from a point estimate standpoint. If you think about the mid-range to high-end, I think you're more in line than thinking about it at the lower end of the range. That's where I would suggest if you're trying to figure out where we're going to close out the year. That's what I'm seeing.

Okay. And you're still on track for about $700 million in cash taxes for the year?

Slightly under, that's right, slightly under. Now we did receive that tax refund, you'll recall, of about $100 million. So it's slightly under $600 million.

And my follow-up just maybe a little bit nitpicky, but if I take your segment expectations and take those and add them up to what it means for an EPS number, I come in well above what your EPS guidance is using all the other assumptions. What is the plug? Is that conservatism or what am I missing?

Well, no. I think if you stand back from this, there's a range on each one of the segments. And then you have to look at what goes on from an intercompany standpoint, what gets eliminated. So the math does work. I don't think you're missing anything. From a big picture standpoint, as we took down the expectation on sales, $500 million or $600 million, that impacted us by about $0.10 or $0.12, and that was offset by the margin improvements that we spoke about a little bit earlier today. We've tightened up the range on the share count from a high end of $3.59 to a high end of $3.54. And we had a little bit of a change from a tax rate standpoint because the assumptions on PBT from a taxable income perspective is slightly higher than what we had seen earlier in the year. But taken all together, the math does work if you add up the pieces.

And the next question will come from the line of Cai Von Rumohr, Cowen and Company.

So if I take the numbers you've given us, so you've taken the bookings target down $500 million to 27%, you're still 30% international. By my math, that assumes something like $2.7 billion in the fourth quarter. It doesn't look like you've gotten a whole lot here. Is that in jeopardy that some of that stuff could slip just because it looks like it's a pretty big number?

Yes. Cai, that's why I was kind of giving you Q4 and Q1. You, of anyone on the call, knows the dates on how international happens. And I wish I could tell you it's going to happen on December 12. You can't predict those that well, so you try and put them in a range. And so for us, we put them in a range that we think they'll be Q4 but they could be the first part of Q1, and that's not so bad. The other part is when you look at our bookings of $27 billion, to be within $500 million of that at this point in time, with everything going on in the world, I don't think it's that bad. And the point is, you always know my frustration on the fact that they don't happen. But we size our business. We do all our workforce planning across the company so that we can, as I call it, win anywhere, perform anywhere and ship anywhere. And we do that so that we can handle these ebbs and flows and that you don't see wild swings in our workforce. And it's because we do this work and we're pretty good at the planning aspect. But there is a chance that, that could move. But it's not moving 12 months if that...

Right. Alternatively, if you look at kind of what your numbers seem to imply for domestic bookings, it looks like it's a number like 4.9 which would be maybe a book to bill of 0.85, 0.87 in the final quarter. Relative to history, that looks a little bit conservative. I don't know in today's environment, maybe it's not. Maybe you could give us some color in terms of is that a...

Yes. I think what's going on there, Cai, from our standpoint is that if you go to Washington and you talk to people, November is when the CR is supposed to end. I guess in our planning, we're kind of thinking it's going to continue for the year. That's back to the question if you look at DoD being flat to negative because of inflation, and that's kind of how we're thinking of it and we're planning it. You know us, there's, the way I always call it A, B and C, you look at best case, you look at worst case and you look at most likely, and we plan on most likely. And that's the way we size our business and we run our business, and I think it's reflected in our margins and our results that we're pretty good at pegging it. We're probably a little bit more conservative on the CR than some might be. But that's -- we just went through the longest one in history going to May, and I want us to be pragmatic about it and that's how we've done it.

You've done an extraordinary job of kind of delivering spectacularly good profitability with...

Cai, would you repeat that again? I kind of missed it.

Very good profitability despite the sales missing. I mean, it kind of looks here like we might see another slip. Is there a point at which it becomes more difficult to deliver that excellent profitably if you kind of get detrimental sales?

I would tell you it gets harder, but it's not foreign to what we do. If you were here and part of the team, everyone, including the functions here at corporate and out in the businesses, everybody knows that our customers are being asked to do more with no more. And we take that challenge very seriously, and there's great alignment on it. It's hard. I wish it wasn't as difficult on everybody, but that's the condition we're in. And from, at least, everyone in Raytheon, I've seen no objections to taking on this task. In fact, everybody takes great delight in finding ways to do it better. And Six Sigma really drives our results around here. It's not a buzzword, it's not a cliché, it's how we do things. And that's, I think, on this call, people have asked me about margins now for 8 or 9 years, and we continue to find ways to improve. And we're not going to give up on that, if that helps.

And the next question will come from the line of Doug Harned, Sanford Bernstein. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: I'd like to be able to get a little bit more sense from you on the environment. Because as we look at the impact of the CR, and this continues to go on, do you see us in a situation where the weaker revenues we're seeing at Raytheon and other -- basically at all the defense companies that this becomes a new reality that we're just sort of plugging away at this tough situation in Washington? Or is it something that you would expect pent-up demand to occur as we get a year or so down the road and have to basically address the issues that we've had working through a very tough decision-making environment in DC?

Yes, I think from my standpoint, if I look at it -- I'll just give you my perspective, personal perspective, that we're going to be coming out of Iraq. Afghanistan, tough situation. We'll continue to work hard there, but we'll come out of Afghanistan. When you do that, the troops will come back, much needed rest. But we're going to have to resize, regroup and be ready for the next mission. And I think the next mission is that, as a country, we're going to have smaller forces that have to operate globally on a moment's notice. They're going to have to have different tools and technologies to help them bridge that gap. We're going to have to recapitalize what we've worn-out because we've never seen an up-tempo like this for this long. And why I feel so strong about the things we're working on, I mean, I don't get to always talk about our technology programs, but some of our wins I didn't touch base on are we're working on sense and warm -- warn. How do we handle the shoot-and-scoot kind of threat using asymmetric tactics? We've got that going on in one business program that we've won there. We've got new advanced thermal imagers that we're looking at that are uncooled that can do more, lighter weight, less energy consumption. We're looking at predictive, understanding the future technologies. We're looking at advanced nonlethal weapons that are solid-state, quantum computing. I didn't get to talk about classified, but for us, our classified is running about 16% of sales year-to-date. We expect growth year-over-year of about 10%. So as we look at our portfolio, we think the things we're doing are going to be in demand as we resize, regroup and take on the future. I know that's a long answer, but I think your premise is a good one. Right now, we're consumed with getting our budget in order, or our house in order as a country, and once we do that, then people are going to work on, okay, what is this new environment that we're in and how do we make sure that we're one of the most capable nations in the world? I don't think that'll be lost in national security. It's always been a priority for the United States. So I'm hopeful. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: And against this backdrop, one of the things you've clearly done is pushing cyber as a growth opportunity. You've done a number of acquisitions there. When you look forward now, do you have what you need there? Or are you still seeing this as an area that you would push harder on in terms of the use of cash?

I'd probably continue to push harder. I believe that threat isn't constant, that this is a threat that travels at the speed of light. It's one click and the threat morphs and you have to work on it from both ends. And that's why we continue to do that. And if you look at it, you not only have to look at it from what I'd call a DoD or intelligence point of view, but the commercial world is realizing the exposures that they have. So this is the new reality, and it's getting a lot of attention. I'm just glad we've got a 4- or 5-year head start on this one because we saw this one coming, as you know.

And the next question will come from the line of George Shapiro, Access 3:42.

42, LLC: Bill, I might have missed it, but did you give how much international sales grew this quarter versus last year?

I don't know that I gave that number. If you look at it -- let me get the number for you here. Our international sales are -- year-to-date are about 25% of our total sales.

42, LLC: So how much were they up [ph] in the quarter?

George, why don't I take that question. On a year-to-date -- in the quarter, international sales were down about $40 million on about 1.5 billion, that equates to about 3%. And that was driven by a number of different things we talked about earlier. We do expect it to rebound in the fourth quarter and being in the mid- to high-single digits as we close out the year.

And what will happen here is the Saudi program will start to take off because as Dave pointed out, we're in congressional notification. Expect that to happen in the next 30 days and then it'll take off.

42, LLC: Okay. And then the other one, probably more for you, Dave. In the last 2 quarters, you've lowered the high end of the sales guidance by about $1 billion, about 4%. My question is, while others of -- companies have lowered their sales guidance as well, yours seems to be somewhat more than others. And I was just wondering if you thought about why or had any reasons for why that might be happening.

No. It's a fair question and I can talk about Raytheon in particular. I'll use the words that Bill spoke about earlier. We have been seeing program awards moving to the right. It's not a matter of losing new programs. This has happened both on a -- from a domestic standpoint, as well as to some extent, from an international standpoint, sort of in line with your first comment. We also have focused a lot of our attention on cost reductions. And we've been talking about that for a while now. And that obviously impacts our cost-type contracts. We also began to see, as we moved into the second half of the year, our customers thinking through the timing of how programs will be let sort of in line with the first comment I made. What I'd like to focus your attention on, with all of that said, is the bookings profile. If you look at Q2 and Q3 together, we had a book to bill of about 1.16, and I understand the arithmetic. The sales are a little bit down. But even with that said, it's a very strong book-to-bill ratio. As Bill spoke to just a few minutes ago with someone else, with Cai, we see the book to bill being -- we have a range of about 1.05 to the high end of about 1.1 as we close out the year. So I think your observation may be correct. But with that said, the bookings continue to be strong. And I think the bookings and the backlog are the best indicator of how the company looks over the longer term.

George, it's Bill. I would add that the CR has a bigger effect on us for this taking it down that when we looked at sales before, we kind of believed what are hearing that people were going to enact the budgets, put them in place. And I think now, we're probably really pragmatic, maybe a little conservative in the sense that we think the CR will continue and we want to reflect that. And that's the way I'd really answer it. There's -- from our standpoint, I just think it's going to be difficult to get things done, and you're getting our best estimate and that reflects the CR continuing.

And the next question will come from the line of Noah Poponak, Goldman Sachs.

I just wanted to follow up on, I think, 2 questions ago that the new norm versus temporary situation debate. And I guess what I struggle with is, we've had most defense companies now miss the top line in the quarter and reduce the full year outlook and attribute it to timing and delays. And as we all try to figure out the forward, timing and delays has an implication that, that situation is going to reverse itself and get better sooner than later. But if we just look at the defense budget, investment is down 3% in the base in '11, and we're now seeing pretty much every defense company's revenues down about the same amount. And then when we look at where the '12 and '13 numbers are likely to shake out, base investment looks pretty similar. So that would tell you, you should just plug in these kind of low single-digit declines for revenue for the next few years, whereas, delays and timing would tell you to do something a lot different. So how do we get our arms around which it is? And why shouldn't we just look at the defense budget?

I think depending on the company, you can look at the budget. I think for us, the top line's not the indicator. For us, it's the granular detail that's within the budget. And if you look at and slice it right, you get both hot spots and cold spots. And when you look at the big programs, they're going to be under a lot of scrutiny and a lot of attention. And so from that standpoint, you really got to look at each company and their portfolio and what's at risk going out in the budget environment. But clearly, to give you my impression, there are delays. And what it is, is that our customers are trying to figure out and do their budget planning. And right now, it's a movable stake in the ground. And it's movable because they're trying to figure out do they plan to a 10% cut, a 5% cut? Do they plan to whatever? And when you're doing all this planning, you're not doing your day job. And it's really hard to get that done. And so from our standpoint, the way I look at it, it's like in a business, you need a budget. You need to be able to plan for something. Once you have that, you set your strategies around it. And what we see right now because of the uncertainty with the super committee and the budget process for the country, it's hard for our customer who gets their funding in that regard. But also when you look at it, about 2/3 of our funding comes from DoD. The balance is international, it's agencies and so forth. So the company itself has changed and morphed over time and will continue to do that. So it's really different, depending on the company. It depends on your fixed-price, cost-plus basis. For us, always think of us as 60% or 55% fixed price versus cost plus. Other companies are the other way around. They might be 60-40. So it really depends on each company as we do that. But my bottom line, it doesn't feel like cancellations. It does still feel like delays. Does that help? I mean, it's really hard to pinpoint. But I would tell you that we don't see programs disappearing. And I think that's the important part that I'd probably have a different concern and I'd talk to you differently if I thought -- saw things just evaporating. We don't see that.

No, I mean that makes sense and it's helpful. I mean, I guess it just takes it back to, I think, George's question, which is that, on paper, it makes a lot of sense to think you guys would outgrow your peers given the international footprint, the focus on cyber intel, the upgrade of existing versus make of new, but the actual bookings and growth numbers have been very similar to others for several quarters in a row. But I guess, you're saying some delays in international in particular and the impact from the CR being disproportionate are probably the explanation for that and still feel like the forward for you is above average.

Yes. I feel the forward is there. I think the other thing I would say is if you look -- I'm trying to go from memory, that we were 1.2 in the second quarter, 1.12 this quarter. And so if you look at it, I think at the beginning of the year, I had made the comment that I thought our bookings would pick up near the last half of the year. We've seen that with -- we look at Q4, we've got a big quarter in front of us. And when you look at this year with the budget process and everything going on, it feels a little bit like Q4, Q1-ish kind of thing. But it's not Q4, and Q3 of next year, it's within a short window, so that's why we feel positive about what we see, and there's just a multiplicity of programs that we have going. That's one of the strengths. And what was a little bit unusual this quarter is to have 13 pretty good-sized programs over $100 million. But those should've happened earlier in the year. And that's the way to think about it.

Okay. We're going to have to leave it there. Thank you for joining us this morning. We look forward to speaking with you again on our fourth quarter conference call in January. Deanna?

And ladies and gentlemen, thank you for your participation. This concludes today's presentation. You may now disconnect, and have a great day.